Business context and reporting period
Hallador Energy Company’s Form 10-K covers the fiscal year ended December 31, 2016, including fourth-quarter results. The company primarily mines thermal coal in Indiana through Sunrise Coal and also holds equity-method interests in oil and gas ventures. Its operations had annual mining capacity of about 10.9 million tons; year-end controlled reserves totaled 174.8 million tons, of which 139.0 million were assigned to operating mines. The Carlisle mine was idle at year-end.
Financial and operating performance
| Metric | 2016 | 2015 | Change or context |
|---|---|---|---|
| Coal sales | $278.9 million | $339.5 million | Down 17.8% |
| Total revenue | $281.5 million | $340.1 million | Down 17.2% |
| Tons sold | 6.317 million | 7.447 million | Down 15.2% |
| Average realized price per ton | $44.15 | $45.59 | Down 3.2% |
| Operating cost per ton | $30.52 | $31.95 | Improved; margin per ton was $13.64 in both years |
| Net income | $12.5 million | $20.1 million | 2016 includes a $16.6 million impairment; reported net income before impairment was $29.1 million, a non-GAAP measure |
| Diluted earnings per share | $0.42 | $0.68 | 2016 reported result |
| Cash from operations | $60.9 million | $94.7 million | Down $33.7 million |
| Capital expenditures | $19.8 million | $31.2 million | Excludes $22.4 million of Freelandville and Log Creek purchases |
| Total assets | $528.5 million | $540.4 million | At year-end |
| Bank debt | $238.6 million | $249.5 million | Gross debt; scheduled to mature in August 2019 |
Fourth-quarter revenue was $71.2 million versus $64.9 million in Q4 2015. The company reported a $3.8 million quarterly net loss, compared with $0.5 million of net income a year earlier, principally reflecting the $16.6 million Carlisle impairment. Q4 average selling price was $41.11 per ton, cost was $29.13 per ton, and reported coal margin was $11.98 per ton.
At December 31, 2016, cash and cash equivalents were $9.8 million, current assets were $79.9 million, and current liabilities were $45.8 million. Management reported $82 million of total liquidity, including $63 million of additional borrowing capacity. The credit facility’s leverage ratio was 2.95 against a 4.50 maximum, and debt service coverage was 2.11 against a 1.25 minimum; the company reported compliance. Annual dividends were $0.16 per share.
Material changes versus prior periods
- Sales volume and realized price both declined from 2015, reducing coal sales despite lower average operating cost per ton.
- Cash from operations fell to $60.9 million from $94.7 million. The company nevertheless reported that 2016 operating cash covered capital expenditures, debt service, and dividends.
- The company recorded a $16.6 million impairment after determining the northern portion of Carlisle could no longer be mined safely and profitably. Carlisle assets had a $118 million carrying value after impairment; management said no further impairment was then required.
- Depreciation and depletion expense was reduced by $2.6 million following a change to units-of-production depreciation for continuous miners and by $4.4 million after depreciation ceased on certain idle Carlisle equipment.
- In 2016, Hallador acquired Freelandville reserves and a sales agreement for $18.25 million and a Log Creek sales agreement for $4.1 million. It also sold down its Savoy ownership from 40.8% to 30.6%.
Outlook, management commentary, risks and unusual items
Management forecast a 2017 capital expenditure budget of $30 million, including $17 million of maintenance spending, and expected operating cash to fund maintenance capital, debt service, and the dividend. Oaktown costs were expected to range from $28 to $30 per ton in 2017. Management also projected annual SG&A of about $11 million and approximately $7 million of costs associated with Prosperity and Carlisle. These are management expectations, not guarantees.
As of year-end, contracts covered a maximum of about 29 million tons through 2024, of which approximately 13 million tons were priced. Management stated that unpriced contracted tons remain firm commitments with market-based pricing mechanisms. Five customers generated 90% of 2016 revenue, with each accounting for at least 10%, creating significant customer concentration. Contract terms can also permit price renegotiation, shipment flexibility, suspension, or termination in specified circumstances.
Management expressed optimism that the new U.S. administration would improve the coal regulatory environment. The Stream Protection Rule was disapproved under the Congressional Review Act in February 2017; the future direction of other regulations, including the Clean Power Plan and WOTUS rule, remained uncertain. The filing emphasizes continuing risks from coal demand and prices, competition from natural gas and renewables, environmental and mine-safety regulation, permitting delays, transportation, labor and operating disruptions, reserve-estimate uncertainty, customer credit and contract performance, access to financing, and surety-bond availability. Debt covenants, refinancing at the August 2019 maturity, and potential additional Carlisle impairment are notable financial risks.
Other notable items: the 2016 effective tax rate was negative 48%, reflecting impairment and tax benefits including statutory depletion; the company recorded $1.75 million of MSHA-cost reimbursements in 2016. The independent auditor gave unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether production, realized prices, and per-ton margins stabilize or improve after the 2016 declines, and how 2017 Oaktown costs compare with management’s range.
- Customer-level contract exposure, renewal and repricing terms, and the extent to which unpriced tons ultimately convert to acceptable market prices.
- Actual available liquidity, covenant headroom, debt repayment capacity, and refinancing plans before the August 2019 facility maturity.
- Whether the Carlisle mine’s remaining carrying value and future cash-flow assumptions support management’s conclusion that no further impairment is required.
- Progress on the Bulldog permit and any sales commitment or financing needed before development; the filing estimates $150 million of development cost at full capacity.
- Changes in regulations, mine permits, reclamation bonding requirements, and customer demand that could affect production, costs, and coal-fired generation.